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Staring at the (Debt) Ceiling

"... [I]it's as if you put charges on your credit card, then decide later whether you're going to pay for them," The Atlantic'sJames Fallows told NPR's Guy Raz yesterday.

This is money past Congresses and this Congress, too, have already voted to spend....

... [R]atings agencies have already said that even though, of course, people know that the U.S. government is not going to finally renege on its obligations, the interest rate that the U.S. has to pay for its Treasury notes and other debt will probably go up if there is this default because it's always been defined as the most riskless investment in the world.

And if and when that happens, essentially interest rates for everything else - for mortgages, for city governments, for state governments - they will all go up, too, because almost all of them are benchmarked to the supposedly riskless Treasury rate.

Last month Paul Krugman anticipated the current impasse, pointing back to December when President Obama agreed to extend the Bush tax cuts — something that Krugman and others "viewed as in effect a concession to Republican blackmail — Marc Ambinder of The Atlantic asked why the deal hadn’t included a rise in the debt limit, so as to forestall another hostage situation (my words, not Mr. Ambinder’s)."

Krugman continues:

... [W]hat’s really going on is extortion pure and simple. As Mike Konczal of the Roosevelt Institute puts it, the G.O.P. has, in effect, come around with baseball bats and declared, "Nice economy you have here. A real shame if something happened to it.... [I]t’s hard to avoid the suspicion that G.O.P. leaders actually want the economy to perform badly.

By encouraging default, the debt-ceiling deniers are playing politics with people’s daily lives. They are making the prospect for economic recovery even more distant while unintentionally adding credence to our competitors’ mistaken belief that America is a great power in decline.

Conservative populists in congress, including delightful characters like Rep. Louie Gohmert (R-TX) who infamously equated homosexuality with bestiality, necrophilia, and pedophilia, have argued that the dire consequences likely to accompany the failure to raise the debt ceiling by August 2 is a myth. This view has also been voiced by "an uncomfortable chunk" of Republican presidential candidates.

With the warning that "If you argue with a fool, you've got two fools," Avlon nonetheless asked two former Republican chairmen of the Council of Economic Advisors.

First, Michael Boskin, who served under George H.W. Bush, and is now a senior fellow at the Hoover Institution.

A real default would have severe ramifications in financial markets and the economy. We need to maintain the full faith and credit of U.S. government securities. The deficit and debt are primarily a spending problem that could condemn us to stagnation or stagflation if not seriously addressed soon. So trying to leverage the debt ceiling increase into spending control makes economic sense...The worst outcome is a default with no real spending control.

And Glenn Hubbard, architect of the Bush tax cuts and dean of the Columbia Business School:

The debt ceiling must be raised—not doing so is irresponsible. The real discussion needs to be about to stabilize, then reduce America's burgeoning debt-to-GDP ratio…. From here, the most sensible path would be an agreement on spending reductions. Then should come a debate (post-raising the ceiling) over reducing entitlement spending versus raising taxes. That debate can also address raising marginal tax rates (as the president proposes) versus limiting tax expenditures (as the [Bowles-Simpson] commission proposes). These debates will be the domestic policy stage for voters to judge in 2012.